Victims of the UK’s car finance scandal are likely to receive compensation payouts averaging £700 resulting from 14m unfair loans, the City regulator said on Tuesday.
The payouts would be less than previously expected, but the Financial Conduct Authority (FCA) said lenders could be landed with an £8.2bn compensation bill, which could go as high as £9.7bn.
This looks likely to be the biggest mass payout relating to a financial product since the payment protection insurance (PPI) mis-selling debacle, which led to 34 million consumers receiving an average of about £1,000 each.
The City regulator’s long-awaited proposals for a compensation scheme cover millions of motor finance agreements taken out between April 2007 and November 2024. Payouts could start next year, it said.
This relates to the alleged large-scale mis-selling of car loans involved in the payment of “secret” commissions to car dealers, and millions of car buyers unknowingly paying more for their finance than they should have.
Launching a consultation, the FCA said that based on the number of consumers it estimated could take part in the scheme, lenders could end up paying out £8.2bn in compensation, though the expected £2.8bn of running costs that firms would also have to meet would take the total bill to £11bn.
The FCA said in August that it estimated “most individuals will probably receive less than £950 in compensation per agreement”. At that time it said it was unlikely the cost of the scheme would be much lower than £9bn, and could be up to £18bn.
Nikhil Rathi, chief executive of the FCA, said: “Many motor finance lenders did not comply with the law or the rules … it’s time their customers get fair compensation. Our scheme aims to be simple for people to use and lenders to implement.”
The vast majority of new cars and an increasing number of used vehicles are bought with motor finance – typically either a personal contract purchase plan or a hire purchase agreement. In a typical year there are about 650,000 motor finance agreements in the new car market.
The compensation scheme has been unveiled despite a supreme court ruling in August that largely overturned a previous ruling that could have led to compensation payouts of up to £44bn.
That is because the FCA had been running its own investigation into so-called discretionary commission arrangements (DCAs) – a particularly controversial type of car finance that was banned in 2021. With these deals, motor finance lenders – typically banks – gave dealers the power to set interest rates on car loans, with dealers getting more commission the higher the interest rate. This practice allegedly incentivised dealers to overcharge customers.
The scheme the regulator is consulting on will largely focus on people whose deal included a DCA, which was by far the most common commission arrangement before it was outlawed.
The regulators said it estimated that 14.2m agreements – 44% of all those made since 2007 – would be considered unfair.
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However, that probably does not translate into 14 million people, as there will be some who bought several cars during this lengthy period who may be entitled to multiple payouts.
The FCA said of the compensation figures it has issued: “The estimates remain highly indicative and susceptible to change.”
Consumers who have already been compensated for complaints covered by the scheme would be excluded.
The FCA said: “When the scheme goes live, we expect firms to resolve promptly those complaints they already have – so customers who have already complained are likely to have their case dealt with sooner.”
In many cases the payouts will be boosted by interest – based on the annual average Bank of England base rate per year plus 1% from the date of overpayment to the date compensation is paid.
The FCA will run an advertising campaign to raise awareness of the scheme.
